R147bn lost through money illegally leaving SA

South Africa is losing roughly R147-billion per year to the illegal movement of money out of the country.

This is according to a report by international monitoring organisation, Global Financial Integrity (GFI), which released a
new report on illegal capital flight this week. The report tracks illegal outflows from 2003 to 2012.

This form of illegal capital flight, or, in economics terms, illicit financial flows, involves the movement of money out of the country in which it is generated, robbing countries of the economic benefits of money generated.

Companies or organised crime groups do this to purposefully hide profits generated or money illegally earned from their record books.

The money moved out of the country frequently funds corruption or organised crime, according to the GFI.

“Illicit financial flows are the most damaging economic problem plaguing the world’s developing and emerging economies,” GFI president Raymond Baker said this week. Outflows in 2012 were the highest on record.

According to the Thabo Mbeki Foundation, this practice in Africa dates back to the 1960s. Many multinational corporations, insecure about the political future of their host countries after decolonisation, sought mechanisms to move their profits offshore.

One way in which money is moved is euphemistically called “tax planning” or the movement of profits to tax havens around the world via the establishment of fake operations in offshore tax secrecy jurisdictions, to hide taxes owed to host countries and increase profits.

The practice has become so common that at least one auditing firm released a tip sheet to its clients, mostly multinational corporations, to advise them on how to avoid paying taxes without alerting tax authorities.

Developing countries lost $991.2-billion in illicit outflows in 2012. And in total, from 2003 to 2012, these countries lost $6.6-trillion.

“This is a trillion dollars that could have contributed to inclusive economic growth, legitimate private sector job creation and sound public budgets,” according to report co-author Joseph Spanjers.

Sub-Saharan Africa had the biggest amount of illegal financial outflows as a share of Gross Domestic Product (GDP) at 5.5%.

Over the past 10 years, illicit outflows have grown 13.2% per year in sub-Saharan Africa.

Deliberate misreportingAnother form of illicit financial outflows involves trade misinvoicing or the deliberate misreporting of the value of commercial transactions on invoices submitted to customs to illegally move money across borders. It is the biggest contributor to illicit flows from developing countries, according to the GFI. This kind of capital flight was responsible for 77.8% of all illegal flows in the developing world over the period studies by the GFI.

But the actual amount of capital that the developing world – and South Africa – loses each year thanks to illegal money flows could be much higher. The GFI says its estimates are “highly conservative” as the institute does not add into its calculations the movements of bulk cash, services mispricing or other types of money laundering.

“This means that many forms of abusive tax avoidance by multinational companies, as well as the proceeds of drug trafficking, human smuggling and other criminal activities, which are often settled in cash, are not included in these estimates,” according to Dr David Kar, a senior economist at the GFI and the main author of the study.

Kar said the rate at which countries are losing money thanks to this kind of capital flight was “extremely troubling”.

“These outflows are growing the fastest and taking the largest toll as a share of GDP on some of the poorest regions in the world. These findings underscore the urgency with which policymakers should address illicit financial flows,” Kar said.

To combat this, the GFI says regulators and law enforcement authorities must ensure that all of the anti-money laundering regulations are strongly enforced.

“All countries should actively participate in the worldwide movement towards the automatic exchange of tax information. Trade transactions involving tax haven jurisdictions should be treated with the highest level of scrutiny by customs, tax, and law enforcement officials,” the GFI said.

Sarah Evans

Sarah Evans interned at the Diamond Fields Advertiser in Kimberley for three years before completing an internship at the Mail & Guardian Centre for Investigative Journalism (amaBhungane). She went on to work as a Mail & Guardian news reporter with areas of interest including crime, law, governance and the nexus between business and politics. Read more from Sarah Evans